Inflation. The one word that scares everyone from banks to governments to ordinary citizens. While inflation has been studied and analysed for decades, it remains an economic phenomenon that can throw a government out of power. But all dark clouds have a silver lining. And so does inflation. There are positives and negatives attributed to the economic phenomenon. Let’s take a close look at the major pros and cons of inflation.
The Positive Effects Of Inflation
1. Increased Purchase Power
One effect of inflation is positive purchase power. Consumers do not wait to buy their dream car, or own a new appliance. Rather than wait, they spend their money before goods become more expensive. The positive purchase power extends to investments as well. Consumers search for the best return on investment before money loses more value.
2. Lower Debt Rates
People who carry high levels of debt will benefit from inflation. Here’s an easy example: If someone has a two percent interest rate on their debt, and their income increases because of inflation, the effective repayment rate declines. This principle applies not only to individual borrowers but also to governments and banks who carry debt.
3. Beats Deflation
Inflation may set the alarm bells ringing. But it is not as catastrophic as deflation, which remains more harmful to an economy. With deflation, the debt burden increases on governments, private businesses, and individuals. This could paralyse public services and create a huge number of bankruptcies. The reason being that repayments may not be made because of higher rates. Economic experts agree that any percentage of inflation is better than deflation.
The Negative Effects Of Inflation
1. High Cost of Living
Inflation first affects an individual’s cost of living. The price of goods increases, which in turn increases the money budget for consumers. They will have to pay more for basic necessities and luxuries. The situation can get bad if a person’s income does not rise with the inflation. Then they have to spend a higher percentage of their income. Another negative is that tax-payers are pushed up into higher tax brackets.
2. Social Inequality
Inflation causes asset prices to rise. Assets such as housing, the stock market, and commodities such as gold overcome inflation. This results in the rich getting richer and the poor getting poorer. Rich households can benefit from their assets. Lower-income households end up spending more on basic necessities. The prices of everyday items such as bread, milk, eggs, and vegetables increase because of inflation.
3. Money Loses its Value
Here’s a common example to illustrate the point:
If you keep some money in a mattress and do not touch it for another ten years, the money would have lost value in the present day. What you could have purchased with that amount in 1990 reduces drastically in 2022. In fact, the US dollar has lost over half its value from 1980 to 2019. If a person stored $1,000 in the 80s, it would not be worth even $500 today.
